Moody’s, S&P, Fitch Settle Connecticut Lawsuit Over Public Bond Ratings

Moody’s Investors Service Inc., Standard & Poor’s and Fitch Inc. reached settlements resolving claims by Connecticut that the credit rating companies unfairly gave lower ratings to public bonds.

The companies will credit Connecticut about $900,000, which will be used to offset the expense of obtaining future ratings on the sales of state bonds, Attorney General George Jepsen said today in a statement.

Connecticut sued Moody’s, S&P and Fitch, claiming that because of deceptive practices by the companies, the state, municipalities and school districts paid higher interest rates than they should have on bonds they issued, and bought unnecessary bond insurance.

“Moody’s is pleased to have reached an agreement with the state of Connecticut to resolve this matter without costly and protracted litigation,” said Michael Adler, a spokesman for New York-based Moody’s.

U.S. Representative Barney Frank, a Massachusetts Democrat, Bill Lockyer, California’s treasurer, and other officials had complained that the credit-rating companies systematically graded municipal bonds lower than corporate bonds, forcing government borrowers to pay higher interest rates.

Richard Blumenthal, then Connecticut’s attorney general and now a U.S. senator, sued the ratings companies in July 2008, calling the system “a secret Wall Street tax on Main Street.”

Same Scale

In March 2010, Moody’s said it would start rating state and local government bonds on the same scale as corporate securities. Fitch also recalibrated its grades for municipal bonds.

“We are pleased to have reached an amicable resolution with the state of Connecticut and look forward to rating the state’s future bond offerings,” Edward Sweeney, a spokesman for New York-based Standard & Poor’s, said in a statement.

Daniel Noonan, a Fitch spokesman, said in a statement that the settlement “reflects our strong belief that Fitch’s ratings were fair and transparent.” Fitch is a unit of Paris-based Fimalac (FIM) SA.

Connecticut filed separate lawsuits against Moody’s and S&P in March 2010 over alleged misrepresentations the companies made about their analysis of structured-finance securities. Those lawsuits are unaffected by the settlement and remain pending, the attorney general said.

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net